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 Technology News | May 2006 
Yahoo Is Unleashing a New Way to Turn Ad Clicks Into Ka-Ching
 Saul Hansell - NYTimes
| | David Henke, left, vice president of engineering, led engineers like David Ku in improving Yahoo's ad system. (Misha Erwitt/NYTimes) |
When Yahoo finally switches on the new search-advertising software code-named Project Panama this summer, users of its search engine will hardly notice a difference. But if Yahoo's project was worth the two years and tens of millions of dollars it cost — far more money and time than it expected — users will find the text ads adjacent to the main search results just a little more interesting, luring them to click on those ads a little more often.
Those clicks should immediately turn into a lot more cash for Yahoo. It will not say how much. But Jordan Rohan, an analyst for RBC Capital Markets, estimates that if the strategy works, Yahoo will increase search-advertising revenue at least 20 percent right away — about $125 million in the fourth quarter of this year and $600 million next year.
That is a big impact from new software, and it speaks to the complex art and science of running a search engine. When hundreds of thousands of advertisers bid for the attention of hundreds of millions of searchers, little changes can have big results.
It is also a sign of how well Google, Yahoo's rival, has mastered those nuances. Mr. Rohan estimates that Google's ability to draw more advertisers and show the right ads to searchers lets it earn about 40 percent more from every search than Yahoo does.
Yahoo realized that its existing software had limitations shortly after it paid $1.6 billion in 2003 to buy Overture Services, the company that invented search advertising. But its effort to rebuild the software was delayed as it shifted its resources to creating its own Web search engine.
Daniel L. Rosensweig, Yahoo's chief operating officer, says he does not regret putting the search-advertising system behind the main search engine.
"We have been very clear that the goose that laid the golden egg is the audience," he said.
When the company turned its full attention to search-advertising software in late 2004, the task was bigger than it initially expected, partly because Yahoo wanted the system to be able to handle ads with graphics and video eventually, not just text.
But now the software is almost done. Today, Yahoo is releasing the technical specifications so that its customers can prepare for changes that will affect many millions of individual advertisements. At an analyst presentation on May 17, the company will offer more details about the introduction and financial impact of Project Panama.
In the meantime, Yahoo's existing system is straining to keep up with the search market. It is harder for advertisers and their agencies to use than Google's, and it has suffered from a series of embarrassing disruptions, leaving paying customers unable to buy ads. Yahoo also faces emerging competition from Microsoft, which has been developing its own search-advertising system.
"Yahoo has taken a lot of bumps and bruises," said Peter Hershberg, a managing partner of Reprise Media, a New York search-advertising agency. "We would get notification every day that data was not available, and that made it very challenging to manage our campaigns." He added that these problems had been cleared up in recent weeks.
Yahoo says the new system is more stable and is built for much higher volume. It hopes to make the system easier to use, both for small businesses and for giant marketers.
Most important, it is building a far more sophisticated system to determine the order in which it displays advertisements. That is crucial because users have a strong propensity to pick from among the top few ads.
When Overture began as Goto.com, an advertising-only search engine, it introduced what turned out to be two powerful innovations: Customers paid for an advertisement only when users clicked on it; and the price of an ad was set by a computerized auction. Thus, the advertiser that bid the most per click was listed first, and so on.
When Google got into the search-advertising business in 2002, it realized that Goto had made a critical mistake. Its system allowed obscure advertisers to gain a prominent position, even if they were not appealing to users and were unlikely to be clicked on. So Google found a way to predict the popularity of ads in order to put the ones that would bring in the most dollars on top.
Google's models have become quite sophisticated, trying to take into account that different ads may appeal to users in different locations at different times. Indeed, Google asserts that a supercomputer network of 100 machines evaluates more than a million variables in milliseconds to pick which to display each time someone searches.
Yahoo is building a cadre of mathematicians and economists to build similar models. But it acknowledges that it does not yet analyze as many data elements as claimed by Google.
Late last month, there was a clear sense of urgency at the headquarters of what is now called Yahoo Search Marketing in Burbank, Calif., near Los Angeles. Amid a sea of Yahoo's trademark purple cubicles, there were signs with "Panama: Are you ready?" written in big letters.
Under them was a mosaic of color-coded notations, tracking the work of 28 teams in three locations that are building the system. On other walls, more signs coordinated another effort, known as Roosevelt, a series of technological bandages meant to keep the old system running until the new one is ready.
"We are flying an airplane while rebuilding it," said David Henke, whom Yahoo hired last year as group vice president for engineering in the search-advertising group. "This is a bigger project than we expected because we are doing it in parallel with our existing systems. It required additional personnel and expertise."
Still, he said he had the complete support of Terry S. Semel, Yahoo's chief executive, and Susan L. Decker, its cost-conscious chief financial officer. When he asked earlier this year for a "gigantic" amount of money to buy a big portion of the thousands of servers and other machines that Panama requires, the approval came back in six hours.
"They said, 'Go figure what it takes and do it right,' " Mr. Henke said.
Gigantic for Yahoo, however, may well be pipsqueak compared with its free-spending competitors. Google plans to spend at least $1.5 billion this year on servers, networking equipment and the facilities to house them, and it is hiring 1,000 people each quarter, many of them engineers. Microsoft plans to spend $2 billion on search and Internet technology this year.
Ellen Siminoff, a former Yahoo executive who now runs Efficient Frontier, a search-advertising agency in Mountain View, Calif., said Yahoo had to recognize that it was in a technological arms race.
"Yahoo hires a lot of smart people, and they can do this if they want to," she said. "The big issue for them is their willingness to spend and keep up with Google's R.& D."
While the underlying Panama system has a lot of capabilities, the first version will present only a subtle difference from what Google offers. Advertisers will simply enter the keywords they want their ad to appear next to and the maximum price they are willing to pay for a click. The most significant option will be to specify a certain geographic region in which the ads will be shown, a feature Google also offers.
Microsoft, in contrast, has sought to distinguish itself by allowing advertisers to enter bids based on the sex, age and other characteristics of the ad viewer. Even though Yahoo could do the same, it says that for now such an approach is not helpful to advertisers.
"The system is built to handle many variables," said Tim Cadogan, the vice president who runs the business side of Yahoo's Web search operation. "We don't want to go overboard" and confuse customers with too many choices.
Yahoo says the main distinction from Google will be in providing information about how a given ad is displayed. Google is often criticized by advertisers as a black box: they do not really know how a given bid will affect the placement of their ads. Yahoo isn't going to tell advertisers either — as its computers will keep experimenting to get the highest ad revenue.
But as advertisers enter each bid, they will see an estimate of how many clicks they will receive each day. More important, a graph will show how many more clicks they can expect for each increased bid.
"One of the primary complaints we get is users can't explain to their bosses what they could get for spending the next $1,000," said Steve Mitgang, the Yahoo senior vice president who oversaw the development of Project Panama. "Now they can take this to their bosses to justify spending more." |
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